The Stock Market's 2024 Bull Run Faces Looming Inflation Reports

The U.S. stock market is currently navigating a critical juncture with an impending inflation reading that holds the potential to test the resilience of its 2024 bull run. This economic barometer is expected to provide insights into whether the nation is steering towards the anticipated soft landing. Investors are closely eyeing the Federal Reserve's actions, anticipating a possible commencement of interest rate cuts in 2024, as the central bank appears to be successfully grappling with inflation despite the persistently low unemployment rate.

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As Tuesday approaches, the focus intensifies on the forthcoming February inflation report from the consumer-price index, serving as a litmus test for gauging the timing of potential Fed rate cuts. According to Phil Camporeale, a portfolio manager at J.P. Morgan Asset Management, the Fed doesn't necessarily require inflation to reach the 2% mark to consider easing; rather, they aim to prevent any further deterioration in inflationary pressures.

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While inflation has significantly receded from its peak of just over 9% in 2022, it has yet to attain the Fed's 2% target. The January inflation data revealed a hotter-than-expected figure, triggering a sharp decline in U.S. stocks on the day of its release. Despite these challenges, Camporeale remains optimistic, deeming this period an extraordinary opportunity to take risks in the U.S. market.

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Camporeale's perspective is grounded in the recent U.S. employment report, which suggests that the Fed is still on track to initiate rate cuts in the current year without succumbing to a recession. This, he believes, bodes well for the stock market.

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The market's response to February's inflation reading is poised to be crucial, with Liz Ann Sonders, chief investment strategist at Charles Schwab, emphasizing the potential impact on the stock market depending on whether the data falls outside the expected range. The relationship between U.S. stocks and the bond market has evolved to be more nuanced this year. Treasury yields, rather than causing a straightforward ascent or descent in the equities market, now influence market breadth, with rising yields potentially worsening breadth and vice versa.

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The 10-year Treasury note's yield finished Friday at 4.088%, the lowest since February 2, but still up nearly 23 basis points for the year. Camporeale previously characterized rising Treasury yields as a signal of dismissing recession concerns, a sentiment echoed by the delay in recession fears in 2023 and the current expectations of interest rate cuts.

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Traders in the federal-funds futures market are increasingly anticipating a Fed rate cut in June, according to the CME FedWatch Tool. Camporeale aligns with this projection, foreseeing a potential rate cut around that time, barring any significant upside shocks in the upcoming inflation report.

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Despite the recent dip in U.S. stock markets, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all recording weekly declines, the S&P 500 remains up more than 7% for the year and just shy of 1% from its record close on March 7.

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Camporeale reveals his bullish stance on equities this year, favoring U.S. large-cap stocks over small-caps in the current market environment. While he anticipates a broader market rally this year, he is not positioning for a "goldilocks" scenario with multiple Fed rate cuts due to falling inflation. Instead, he envisions a soft landing scenario where the U.S. economy avoids a recession, with GDP expanding at around 2%, and inflation gradually declining, albeit not reaching 2% by year-end.

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Looking ahead, Camporeale expects the Fed to progressively lower rates in 2024, with inflation following the soft landing trajectory he envisions. U.S. economists at BofA Global Research echo a similar sentiment, anticipating a deceleration in core inflation in the consumer-price-index report for February and alleviating concerns of a reacceleration after the January data.

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